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Stocks rallied yesterday amid bank earnings and growing speculation the Federal Reserve will delay raising interest rates until 2016. Treasuries fell and gold erased its loss for the year. The dollar fell on benign CPI data.
Speaking of inflation, the year over year CPI dropped back to zero in September, the result of plunging oil prices. Core inflation [ex food and energy] led by rents rose by 1.9%, slightly higher than the 1.8% expected increase and is the highest level since July 2014. August’s core CPI rose by 1.8%.
Will year over year inflation begin to show an increase, the result that falling energy prices are unlikely to be repeated during the next 12 months? As noted, the core CPI is close to 2%.
What about the impact of rising rents upon OER (what someone thinks one can rent their house for)? OER is the largest component of most inflation indices.
And then there are job. It was reported yesterday the four week moving average of jobless claims fell to the lowest level since December 1973. Will wage inflation begin to accelerate either by fiat [political action such as pressure to increase the minimum wage] or from the dearth of qualified workers?
If so how will such an increase impact inflation given that wages are the largest cost of production.
Wow! The above narrative is the inverse of today’s rabid deflationary diatribe.
I will argue a large portion of yesterday’s advance can be credited to HFT given that key technical levels were broached. The danger with such an advance, gains can be quickly erased for the same reason.
About three months ago I opined a major transition may be at hand. My remarks became prophetic for reasons I generally stated. Today I am echoing similar sentiment as I think the economic and geopolitical narrative may be different in two months.
The possible narrative…deflation is no longer a threat, inflation led by oil and rents may be rising. What about growth? This depends upon monetary velocity or the turnover of money, which the data is clearly indicating is accelerating. If history is any type of guide, growth too should be accelerating.
What will happen today?
Last night the foreign markets were up. London was up 0.45%, Paris up 0.31% and Frankfurt up 0.17%. China was up 1.32% Japan up 1.08% and Hang Sang up 0.78%
The Dow should open nominally lower as all weighed corporate results and awaiting confidence and manufacturing data. The 10-year is up 3/32 to yield 2.0%.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.